After-Tax Return

Taxes can significantly reduce investment returns, so the return that matters most to an investor is often the after-tax figure.

For example, an investment earning 8% in a year, where all of that return is taxed at 25%, gives an after-tax return of 6%. Over many years, this difference compounds into a large gap in final wealth.

The impact of tax depends on the type of return and the investor's situation. Interest, dividends and capital gains may be taxed at different rates. Gains may be taxed only when an investment is sold, allowing tax to be deferred. Investments held in tax-advantaged accounts, such as certain retirement or savings accounts, may grow partly or fully free of tax.

Comparing after-tax returns can change which investment looks best. A tax-exempt bond yielding 3% may give a higher after-tax return than a taxable bond yielding 4% for an investor in a high tax bracket.

Because tax rules and rates differ between countries and individuals, after-tax returns are personal. Fund performance figures are usually reported before tax, so investors need to consider their own tax position.